JAZZ

Jazz Pharmaceuticals Plc - 10-Q Summary (Period Ended Sept 30, 2010)

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Jazz Pharmaceuticals, Inc. for the period ended September 30, 2010. Jazz is a specialty pharmaceutical company focused on neurology and psychiatry. Its primary marketed products are Xyrem (sodium oxybate) for narcolepsy and Luvox CR (fluvoxamine maleate) for obsessive-compulsive disorder and social anxiety disorder. The company is also developing JZP-6 (sodium oxybate) for fibromyalgia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 45% for the three months and 34% for the nine months compared to the prior year periods. Product sales grew 46% (three months) and 51% (nine months), driven primarily by price increases and volume growth for Xyrem.
• Profitability Turnaround: The company reported a net income of $13.2 million for the quarter, compared to a net loss of $1.7 million in the same period in 2009. For the nine months, net income was $8.3 million versus a net loss of $12.5 million in 2009.
• Debt Restructuring: In June 2010, the company repaid all senior secured notes (totaling ~$119.5 million principal) and entered into a new credit agreement consisting of a $50 million term loan and a $15 million revolving credit facility. This reduced the interest rate from a fixed 15% to a variable rate of 5.75% and extended the maturity to June 2013.
• Loss on Extinguishment: A one-time loss of $12.3 million was recorded in the nine months ended Sept 30, 2010, related to prepayment penalties and write-offs of unamortized costs associated with the debt refinancing.
• Contract Revenues: Contract revenues decreased significantly in the nine-month period ($0.9 million vs. $10.9 million in 2009) due to the recognition of a $10 million milestone payment from UCB Pharma in 2009.

Guidance, Outlook, Risks, and Unusual Items

• JZP-6 Regulatory Status: The FDA issued a Complete Response Letter (CRL) on October 8, 2010, stating it cannot approve the New Drug Application (NDA) for JZP-6 (fibromyalgia) in its present form. The FDA cited the need for additional clinical studies, clarification on patient population, and safety measures (REMS). The company plans to meet with the FDA to determine the next steps.
• Generic Competition: An Abbreviated New Drug Application (ANDA) was filed for a generic version of Xyrem in July 2010 (notified by Roxane Laboratories). The company intends to file a patent infringement suit, which could stay FDA approval for up to 30 months. Litigation regarding generic Luvox CR with Actavis remains pending.
• Supply Chain Risks: The company relies on a sole supplier, Lonza, for sodium oxybate. The supply agreement with Lonza terminates on December 31, 2011. Jazz has signed an agreement with a new supplier, Siegfried, but FDA approval for Siegfried is not expected until the second half of 2011.
• Price Increases: On November 1, 2010, the company implemented a price increase of approximately 20% for Xyrem.
• Liquidity: Management believes existing cash and operating cash flow will fund operations through at least 2011. The company has a Committed Equity Financing Facility (CEFF) of up to $75 million available if needed.

Key Facts for Investor Verification

• Verify the timeline and requirements outlined in the FDA's Complete Response Letter for JZP-6 and the company's plan to address them.
• Monitor the status of the patent infringement lawsuit against Roxane Laboratories regarding generic Xyrem.
• Confirm the progress of Siegfried's FDA approval as a new supplier of sodium oxybate to ensure no supply disruption occurs after the Lonza contract ends in late 2011.
• Assess the impact of the 20% Xyrem price increase implemented in November 2010 on future sales volumes.
• Review the company's compliance with the new credit agreement covenants, specifically the minimum monthly liquidity requirement of $10 million (increasing to $20 million after March 2011).